By TIOL News Service

BANGALORE, FEB 17, 2015: THE issues before the Bench are - Whether the nomenclature given to an article by the Revenue is decisive to determine the tax liability or the eligibility for input tax credit; Whether a Work Station is a computer accessory or a furniture as understood in the common parlance and Whether the assessee engaged in developing software is not allowed to claim input tax credit of tax paid on work station as it falls in the schedule of restricted items under KVAT. And the verdict goes against the Revenue.

Facts of the case

The assessee is engaged in the business of development and sale of computer software and also technical consultancy services. During assessee the VAT authorities found that the assessee had claimed input tax under the nomenclature of work stations. The Revenue disallowed such input tax on work stations considering them as input tax restricted goods falling under Entry No.5 of the V Schedule read with Section 11(a)(2) of the Karnataka Value Added Tax, 2003.

After losing at the first appellate stage, the assessee filed an appeal before the Tribunal which held that work stations are accessories of technical goods viz., of computer/computer peripherals falling under Entry No.3 of V Schedule read with Section 11(a)(2) of the KVAT Act, 2003.

On appeal, the HC held that,

++ in order to answer the said question, first we have to understand whether this work station is a furniture or not. What is ‘Furniture’, has been the subject matter of Judgments of various Courts in the country;

++ the word ‘furniture’ has not been defined under the Act. In Chambers 20th Century Dictionary ‘furniture’ is defined as movables either for use or ornament with which a house is equipped. In the Webster Dictionary II edition, it is defined to mean articles of convenience or decoration used to furnish the house. Insofar as the word ‘furnished’ is concerned, the Shorter Oxford English Dictionary defines the word ‘furniture’ has to fit up with all that is requisite including moveable furniture which is now predominant notion. Shorter Oxford English dictionary gives the meaning of the word ‘furniture’ as movable articles in a dwelling house, place of business or a public building. Therefore, insofar as the dictionary meaning is concerned, it means all articles of convenience or decoration used for the purpose of furnishing a place of business or office or a house as articles of furniture. If any term or expression has been defined in the enactment then it must be understood in the sense in which it is defined but in the absence of any definition being given in the enactment the meaning of the term in common parlance or commercial parlance has to be adopted. Apparently, the deciding factor is the predominant or ordinary purpose or use. It is not enough to show that the article can be put to other uses also. It is its general or predominant user which seems to determine the category in which an article will fall. The test, is not whether the articles are capable of being used as furniture; the test is whether they are ordinarily so used and can be accepted as such according to the general or popular notion of what furniture is;

++ Sales tax is a liability which affects the mercantile community and the consumer public. The list of items mentioned in the notification must be construed according to the understanding popular in that community and section of the people. To impose a technical or artificial meaning will result in defeating or stultifying the intention behind the provision. According to the general or popular notion of what furniture is, whether the article can be described as furniture turns upon its definition in relation to daily needs of a convenient living. It is the general or predominant user which determines the category in which an article will fall and therefore, the nomenclature given to an article is not decisive;

++ from the provisions (Section 11), it is clear that input tax paid by an assessee in purchasing the goods on set out in V Schedule are not eligible for input tax deduction. That rule has an exception. That is, if the goods mentioned in V Schedule are resold then Section 11 is not attracted. But the question in this case is, whether the goods in respect of which input tax rebate benefit is claimed is a goods which fall within V Schedule;

++ Section 11 is an exception to the general rule that an assessee is entitled to input tax deduction while computing its tax liability. If the input tax is paid in respect of goods which does not fall under V Schedule, Section 11 is not attracted and the assessee is entitled to the benefit under Section 10 of the Act. It is in this context, we have to see whether this work station purchased by the assessee falls within V Schedule under the head ‘Furniture’;

++ the Work stations may be a computer or device such as computer work station, a high performance desktop computer as may be designed for scientific or engineering applications or a music work station. The work station or a cubicle is used to sit and operate a computer with all attendant accessories. It is a nature of accessory for use in the manufacture or processing of goods for sale and those are used in computing etc. In common parlance it is not understood as a furniture for a convenience or a decoration. It is not used as chairs, tables, cupboards etc. The purpose for which the said work station is used is in reality for a manufacturing process as a part of manufacturing process. At any rate, it is so understood in the trade. A work station includes a cubicles, a computer on the top of cubicle and chair in front of the computer to sit and work on the computer and also electrical connections for getting electricity as well as internet connections. Therefore, a work station is not used as a convenience or for decoration in a dwelling place or used to furnish a place of business. Therefore, it is not possible to accept the view of the revenue that a cubicle or a work station would fall within the meaning of the word ‘Furniture’ and therefore, the assessee is not entitled to the benefit of input tax paid for acquiring such work stations. Therefore, we answer the said substantial question of law in favour of the assessee and against the revenue.

(See 2015-TIOL-395-HC-KAR-VAT)